APR vs APY
The same percentage means different things depending on which side of the loan you're on.
APR and APY both express interest as a percentage, but they answer different questions.
APR — Annual Percentage Rate
Used on loans: mortgages, credit cards, auto loans, personal loans.
APR is the cost of borrowing, expressed as a yearly rate that already includes most fees the lender bakes into the loan (origination, points, sometimes PMI). It does not compound — it is a flat percentage applied to the balance.
APY — Annual Percentage Yield
Used on deposits: savings accounts, money market accounts, CDs.
APY is the earnings rate on a deposit, expressed as a yearly rate after compounding. If a bank says 4.50% APY on a savings account, you will actually receive 4.50% over a year, even if interest credits monthly.
Why the distinction matters
A credit card with a 21% APR does not mean you pay 21% over the year if you carry a balance. Because interest compounds, the effective annual rate is higher — closer to 23%. The 21% is the simple-interest sticker number.
Conversely, a CD's 5.00% APY already factors in compounding, so you do receive that 5% if you hold the full term.
When you compare across products
- Comparing two mortgages? Use APR. Both lenders quote it the same way.
- Comparing two savings accounts or CDs? Use APY.
- Comparing a savings account against a money-market fund? APY against 7-day SEC yield (a different but comparable yield measure).
Quick sanity check
If a savings APY looks higher than the bank's APR on its credit card, something is wrong. Lending rates almost always exceed deposit rates — that spread is how banks make money.